Dollar Rises 3rd Week as Central Banks Diverge

Rachel Evans

November 8, 2014 — 12:00 AM EST

The dollar rose for a third straight week after the European Central Bank joined the Bank of Japan in firming its commitment to monetary stimulus even as the Federal Reserve prepares to move toward higher interest rates.

The U.S. currency pared gains yesterday after employers added fewer workers than forecast in October. The euro touched a more than two-year low as the ECB held rates steady and President Mario Draghi pledged to expand its balance sheet. The yen slid to its weakest in seven years after BOJ Governor Haruhiko Kuroda said there was no limit to the easing measures the bank could take to tackle deflation. The ruble tumbled, leading emerging-market currencies lower.

“The U.S. economy’s not perfect, but it does seem to be operating much better than most of its peers,” Stephen Stanley, chief economist at Amherst Pierpont Securities LLC, said by phone yesterday. “The broader picture’s still pretty supportive for the dollar.”

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, climbed 1 percent to 1,091.46 this week in New York. It touched 1,099.28, the highest on a closing basis since April 2009.

The greenback advanced a third week against the yen, rising 2 percent to 114.60 and touching 115.59, the highest level since November 2007. It gained 0.7 percent to $1.2455 in a third weekly increase versus the euro. The 18-nation shared currency gained 1.5 percent to 142.73 yen.

Emerging Markets

A JPMorgan Chase & Co. gauge of volatility soared to the highest level since February. The Global FX Index rose 46 basis points, or 0.46 percentage point -- the most in eight weeks -- to 8.28 percent.

Emerging markets bore the brunt of the dollar’s gains, with 23 of 24 developing-nation peers sliding versus the greenback. An index of 20 such currencies touched the lowest since March 2009.

The ruble lost the most, slipping 8 percent, its worst week in at least 11 years. The central bank is “ready to increase foreign-currency interventions at any moment, as well as to use its other financial-market tools,” according to a statement yesterday.

Brazil’s real followed, sliding 3.2 percent, amid concern President Dilma Rousseff will name an economic team that will maintain policies that helped push Brazil into a recession during the first half of the year.

Norway’s krone fell to its lowest versus the dollar since March 2009 as oil prices tumbled to a four-year low.

The Hong Kong dollar, which is pegged to the greenback, was the week’s only gainer, adding less than 0.1 percent.

Kuroda, Draghi

The yen weakened versus most of its 31 major counterparts after the Bank of Japan’s surprise addition to stimulus last week. The central bank plans to expand the monetary base by 80 trillion yen ($698 billion) a year, up from 60 trillion yen to 70 trillion yen.

The BOJ has an “unwavering commitment” to defeating deflation, Kuroda said this week. “As for measures for additional easing, I don’t think there is a limit, including on bond purchases,” he said.

The currency reached 119.79 per Swiss franc, the lowest in more than three decades. The yen slid for a fourth week against the euro, the longest streak of declines since December.

The shared currency tumbled Nov. 6 after Draghi said ECB policy makers are unanimous in their commitment to expand stimulus should subdued inflation make it necessary. The central bank “has tasked relevant euro system committees with the timely preparation of further measures to be implemented if needed,” he said.

Euro Decline

Hedge funds and other large speculators increased bets on a decline in the euro against the dollar to the most since June 2012. The difference in the number of wagers on a drop compared with those on a gain -- net shorts -- was 179,021 on Nov. 4, from 165,707 a week earlier, according to data from the Washington-based Commodity Futures Trading Commission.

Investors boosted bets on the dollar versus eight of its major peers to a record 366,737, the data show.

While the ECB’s current program, which Draghi said would last at least two years, envisages purchases of asset-backed securities and covered bonds, the central bank hasn’t yet committed to broad-based bond buying, or quantitative easing.

‘Unconventional Policies’

Central banks should be prepared to “employ all available tools, including unconventional policies,” to support growth and reach inflation goals, Fed Chair Janet Yellen said in a speech yesterday in Paris.

The U.S. central bank ended its own program of asset purchases last month and is moving toward its first interest-rate increase since 2006.

Japan’s currency lost 5.7 percent in the past three months, the worst performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar was the best, gaining 7.3 percent, while the euro declined 0.8 percent.

“Policy divergence is going to be a very big factor in greenback strength over the next six to eight months, especially as we get closer to a rate hike from the Fed,” Lennon Sweeting, a San Francisco-based dealer at the broker and payment provider USForex Inc., said in a telephone interview. “This period of broad dollar strength seems to be in a position to continue.”

Decoupling ‘Confirmed’

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The dollar pared its weekly gain, falling the most in three weeks yesterday, after employment rose less than forecast in October even as the jobless rate declined to 5.8 percent. The 214,000 increase in U.S. nonfarm employment reported by the Labor Department followed a 256,000 advance the prior month that was more than initially estimated. The median forecast in a Bloomberg survey called for a 235,000 advance.

A report next week is forecast to show an advance in retail sales, suggesting consumers are growing more confident.

“Everything suggests a continuation of the dollar rally,” Athanasios Vamvakidis, head of Group of 10 foreign-exchange strategy at Bank of America Merrill Lynch in London, said by phone on Nov. 5. “The decoupling hypothesis from the rest of the world has been confirmed.”